Economics as a social science

Economics examines human behaviour, focusing on how individuals, organisations like businesses and governments, manage limited resources. This focus on people and their choices classifies economics as a social science.

Similarities between economics and natural sciences

Economists adopt methods akin to those in sciences such as biology to explore economic issues.

These methods include:

• Creating theories and models to explain events, such as the factors determining currency values.
• Applying simplifying assumptions to focus on key variables in a study.
• Evaluating theories against real-world evidence using tools like graphs, statistics, observations, and logical reasoning.
• Gathering empirical data from real-life observations or experiments to refine models.
• Employing models to forecast future outcomes.

The methodology used by economists

Unlike natural sciences, economics cannot rely on controlled lab experiments where variables are isolated. For instance, studying how price affects cheese demand is complicated by uncontrollable factors like fluctuating incomes in the real world.

Challenges in economic methodology

• Multiple variables exist in economies, making it hard to isolate effects.
• Real-world conditions prevent holding all factors constant during analysis.

The role of ceteris paribus in economic analysis

To address the issue of multiple variables, economists use the assumption 'ceteris paribus', meaning 'all other things remaining equal' in Latin. This allows focused study of relationships between specific factors.

How ceteris paribus is applied

• When examining links between two elements, such as price and demand, economists assume other influences like income or preferences stay unchanged.
• This assumption aids in building theories, creating models, and generating predictions.

Factors influencing economic decisions

Economic choices by individuals, businesses, or governments often stem from subjective views rather than pure efficiency.

Influences on economic decisions

• Normative statements - Opinions that shape choices.
• Moral and value judgements - Views like the need to reduce poverty through wealth sharing.
• Political considerations - Actions like tax cuts to gain public support.
• Short-term gains - Focusing on immediate positives, such as election wins from reduced taxes, while ignoring future issues like lower government funds leading to spending reductions.

Positive and normative statements

Economic statements fall into two categories: positive and normative. These differ in their basis and testability, affecting how they influence policy and analysis.